London property, Detroit, US car industry, Bill Bonner

Why London property is on top of the world

01.06.2007

by Bill Bonner

Our Most Popular Articles

This genius investor does dizzying levels of research to uncover...Half Price Shares!

“You can’t go wrong with property in Central London,” is an expression you hear often on the banks of the Thames. “You can’t go wrong with property in central Detroit,” has the same number of syllables. Eight out of nine words are exactly the same. The final one, though, makes a big difference. It changes the meaning, from delusional faith to desperate comedy.

A friend reports: “Detroit is a contrarian utopia: needles, drug baggies, gangs on street corners, boarded up businesses, empty office buildings, vacant mansions. For Sale signs everywhere. It’s hell. Wayne County, Michigan, home to Detroit, lost more people from the beginning of 2005 to the end of 2006 than any US county except the four in Louisiana and Mississippi devastated by Hurricane Katrina, according to Census figures released in March. Since 2001, Michigan has lost more jobs than any other state in the Union... Away from downtown, things are not much better. Lots of homes in the ’burbs have been on the market for two, three and four years with no offers – not even so much as a low-ball offer. Larger existing homes in Macomb County can be purchased for about 40% less than replacement cost.”

Where it went wrong for the Detroit property market

There was a time when you could say “you can’t go wrong buying property in central Detroit” with a straight face. In the early 20th century, Detroit was on top of the world. It was the Motor City, home to the biggest new industry since the invention of the mechanical loom. Even in wartime, the assembly lines didn’t slack off, working around the clock to provide trucks and tanks to armies across the world. War or peace, everyone wanted more vehicles. How could you go wrong buying property in the city that made them?

There were once dozens of automakers in Coventry, England, too. Now, there are a handful in the whole country, every one foreign-owned. America’s automakers consolidated sooner – in Detroit. They’re still running and still in US hands, but probably not for long. We remember, in our own lifetimes, when the first funny-looking cars came into the US market from Germany and Japan. Cheap and stingy on fuel consumption, the little autos gained a beach-head in the US during the oil crisis and inflation of the 1970s. I bought a Honda Accord in 1975. My father, a Pearl Harbor veteran, saw it and was appalled. “Those people tried to kill me for three years,” he said.

Congress wanted to protect the US automakers in the worst possible way – by placing a per-car tariff on imports. The Japanese and the Germans moved up-market, to make more per car sold. Soon, the foreign automakers were head to head with America’s big luxury models too – and winning. And now, the motor city is threatening to conk out completely. But investors are an opportunistic lot. Some look at Detroit and think they are looking at nothing more than a cyclical setback in the life of a great city. Let the US auto industry go broke, they say: then, new, more vigorous entrepreneurs, without all GM’s and Ford’s baggage, can climb into the driver’s seat. And Mo’town will rock and roll again.

If you believe that, you should get on a plane now. Whole skyscrapers change hands for less than the price of a three-bedroom flat in Mayfair. The 65-storey David Stott building, for example, is on the market for less than £2m. For £500,000 you can buy a 12,000-square-foot Italian renaissance-style mansion, complete with an intricate, hand-carved walnut main staircase and imported wood panelling throughout. “That may seem like a bargain,” says a CNBC reporter, “considering the 1915 limestone house sits on over two acres and is just three miles from the city centre. But then again, this is Detroit, Michigan.” Speculators might do better to look at Liuzhou, China, where GM is producing its new Wuling Sunshine minivan. In 2002, China made a million cars and trucks. By 2020, it’s expected to produce 15 million units, more than the US. How can Detroit stage a comeback with that kind of competition?

Instead, maybe the city will join the ranks of the dead, along with Ctesiphon, Mesa Verde, Persepolis, Kish, Harapaa, Babylon, Soddom and Gommorah. Its apartments may sell for no more than places in Mapungubwe, Tiahuanaco, Tyre, Nineveh, Troy, Golconda and hundreds of other defunct metropolises.

Why London property is different?

But we’re here in London; what’s the worry? No cars are built in London. Instead, financial services are our trade. And is there any better game to be in? Not in 2007. Business is booming. All over the world, companies are set up, financed, bought out, refinanced, IPOed, taken private, merged, acquired, re-IPOed and leveraged in more ways than you can count. It will be a cold day in hell when the Chinese can compete in this industry. And here in London, we are in the capital city of this new money-shuffling commerce. London is on top of the world – just like Detroit once was. Prices in Central London can only go up.